Post on 13-Apr-2018
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FOJULY/AUGUST 2012 | WWW.CFO.COM
FINANC
TRAINING TH
DELL WAY
THE 201WORKING
CAPITA
SCORECARD
RECIP
FOR PROFIT
AT POPEYE
No one ever thoughtimplementing Dodd-Frankwould be easy
At Exelis, DefenseNever Rests
Lessons FromJPMorgansBotched Hedge
UnfinishedBusiness
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In the United States, insurance coverages are underwritten by individual member companies of Zurich in North America, including Zurich American Insurance Company. Certain coverages are notavailable in all states. Some coverages may be written on a non-admitted basis through licensed surplus lines brokers. Prior results do not guarantee a similar outcome. Risk engineering services are
Since 1912, our mission has been
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At Zurich, we have a rich history of helping our customers succeed.
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provided by Zurich Services Corporation.
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Cover photo-illustration by Stephen Webster. This page, clockwise from top
left: Matthew Furman, David Plunkert, Stan Kaady
38UnfinishedBusinessTwo years after the passage
of the Dodd-Frank Act, the
laws implementation is
far behind schedule, and its
success is still in doubt.
By Randy Myers
46Too Much OfA Good ThingWorking capital is piling up at
Americas largest companies.
By Russ Banham
51The 2012 Working
Capital Scorecard
The best and worst performers
in 20 industries.
FeaturesJuly/August 2012
Volume 28, No. 6
CONTENTS
DODD-
FRANK
ACT
Our business has four keyareas that align well withwhere our government cus-tomers are headed, basedon their public comments.
Peter Milligan, CFO of Exelis
34
34On the Record
Defensive ManeuversDefense contractor Exelis
is ready to adjust to an era of
reduced Pentagon spending,
says CFO Peter Milligan.
Interview by Edward Teach
60Take-Away
Recipe for ProfitsPopeyes Louisiana Kitchen
CFO Mel Hopetalks about
collaborating with franchisees
to grow the business.
Interview by Marielle Segarra
People to Watch
Mel Hope
1cfo.com | July/August 2012 | CFO
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2 CFO| July/August 2012 | cfo.com From top to bottom: Miguel Davilla, courtesy Make Meaning, Bloomberg/Getty Images, Gordon Studer
CONTENTS
15 | ACCOUNTING & TAX
Renewed ConcernsAbout RenewablesKey tax credits for investments in
renewable-energy projects could soon
begin to expire. By Kathleen Hoffelder
The Second-Greatest RiskCFOs of multinational companies rank
transfer-pricing risk just behind globalcompliance. By Kathleen Hoffelder
18 | CAPITAL MARKETS
Finding Life after DebtAn acquisition saves a software
company from crushing leverage.
By Vincent Ryan
Private EquitysPicky AppetitePE firms are craving service and health-
care targets, according to a new survey.
By Vincent Ryan
21 | GROWTH COMPANIES
Hands-On GrowthThe finance chief of Make Meaning says
the start-up has what it takes to bring
customers through the door. Can it keep
them coming back?
By Marielle Segarra
23 | HUMAN CAPITAL
Training at Dell: Here,There,And EverywhereThe computer giants financial-education
programs rely on a mix of long-distance
and local learning. By David McCann
26 | RISK MANAGEMENT
The Hedge That WasntJPMorgan Chases $2 billion tradingmiscue is a costly lesson in how not to
protect against potential losses.
By Vincent Ryan
29 | STRATEGY
Hawaiians Big Apple VentureHow Hawaiian Airliness CFO prepared
for the launch of an ambitious new
route. By David Rosenbaum
Euro Slide Sparks
M&A InterestThe weakening currency makesEuropean assets more attractive.By Andrew Sawers
32 |TECHNOLOGY
Digging Out from Big DataUnstructured data is piling up in corpo-
rate computers, making compliance
and other tasks far more difficult.
By David Rosenbaum
Up Front4From the Editor
7Letters
11Topline The Supreme Court upholds the Affordable Care ActFASB andthe IASB approve two accounting methods for lease expenses mostCFOs expect employees to delay retirementCEO turnover rises com-panies have cash but wont spend it, says a recent survey and more.
55BUSINESS OUTLOOK
Duke University/CFOSurvey Results
Muddling ThroughCFOs continue to hire, but are less
optimistic. By Kate OSullivan
58 FIELD NOTES
Perspectives from CFO Research
Putting Social Networks to WorkCompanies are finding real economic value
in cooperation and social media.
By Josh Hyatt
By the Numbers
18
21
23
32
July/August 2012
Volume 28, No. 6
2.5%The average bywhich U.S. CFOssay they willexpand theirfull-time domes-tic workforceover the next12 months.
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2012 AT&T Intellectual Property. All rights reserved. AT&T, the AT&T logo and all other AT&T marks contained herein are trademarks of AT&T Intellectual Property and/or AT&T affiliated companies.
RE
PAIRED
WRECKED
It only takes a second foran accident to happen.
Why should it take forever to fix it?Business responds faster because
data does more in the AT&T network.
In here, intelligent data automates all the right
actions, at all the right points, all at the same time.
Details of the accident are collected and distributed.
Insurance claims are filed and reviewed. Parts are
preordered; paint colors are premixed.
In here, wrecks get repaired faster because the same
data that reports an accident is already at work fixing it.
Its the AT&T networka network of
possibilities teaching data how to do more.
To learn more, visit att.com/business
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CFO, Vol. 28, No. 6 (ISSN 8756-7113), is published 10 times a year, with combined January/February and July/August issues, and distributed to qualified chief
financial officers by CFO Publishing LLC, 51 Sleeper St., Boston, MA 02210( executive and editorial offices). Copyright 2012, CFO Publishing LLC. All rights re-
served. Neither this publication nor any part of it may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic,
mechanical, photocopying, recording, or otherwise, without the prior permission of CFO Publishing LLC. Requests for reprints and permissions should be
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are $15 per copy, prepaid, and VISA/MasterCard orders only. Mailing list: We make a portion of our mailing list available to reputable firms.
Kory Addis
LEADERSHIPGeneral Mills CFO Don Mulligan
will explain how to build top-
notch finance teams at CFOs
CFO Rising: The Future of Fi-
nance conference in Las Vegas,
September 30October 3, 2012.
See www.cfo.com/conferences.
ACCOUNTINGIf you want expert advice on
presenting financials in an
easy-to-comprehend way, check
out Painting withNumbers,by
former high-tech CFO Randall
Bolten (John Wiley, April, $39.95).
Among other things, youll learn
why pie charts are bad, why
a natural P&L is good, and
why you should never, ever be
sleazy about the vertical axis.
See www.johnwiley.com.
GLOBAL BUSINESSBritish economist Roger Boo-
tle won the 250,000 Wolfson
Economics Prize in July for his
analysis of how countries could
leave the euro with the least
amount of fuss. See How to
Break Up the Euro on cfo.com.
FROM THE
EDITOR
EDITORS PICKS
There have been numerous accom-
plishments (however controversial),
including the establishment of the
Financial Stability Oversight Council,
the Consumer Financial Protection
Bureau, say on pay shareholder vot-
ing, and hedge-fund registration and
reporting. But some of the thorniest
provisions of the law remain on the
drawing board, such as the Volcker
Rule, which would limit banks propri-
etary trading. One seasoned observertold Myers that implementing Dodd-
Frank wouldnt be finished until at
least well into 2013.
Even partial progress on Dodd-
Frank is too much for those who con-
tinue to insist that the law is unneces-
sary or worse and should be repealed,
either in whole or in part. One promi-
nent critic of the Volcker Rule has been
Jamie Dimon, the superstar CEO of
JPMorgan Chase. It was more than a lit-
tle embarrassing for Dimon, therefore,when JPMorgan revealed in May that
its chief investment office had lost at
least $2 billion on an ill-advised trade
(The Hedge That Wasnt, page 26).
There have been many criticisms of
Dodd-Frankit goes too far, it doesnt
go far enough, its too complex, its a
brake on the economy, and so on. But
as Myers reminds us, its hard to fault
the motivation behind this sweeping
overhaul of the nations financial sys-
tem. After all, it wasnt long ago that
the government was forced to pump
trillions of dollars into the system to
keep it from failing, while millions of
people lost their jobs, their savings,and their homes.
Elsewhere in this issue we offer the
latest installment of one of our most
popular features, the annual working
capital scorecard, done in cooperation
with REL Consulting (Too Much of a
Good Thing, page 46). See how your
company stacks up against some of the
best (and worst) performers in work-
ing capital management in Corporate
America. CFO
Edward Teach
Executive Editor
4 CFO| July/August 2012 | cfo.com
On July 21, 2010, President Obama signed into law
the Dodd-Frank Wall Street Reform and Consumer
Protection Act. Two years later, regulators are still hard at
work putting the mammoth law into effect. Although they
have written thousands of pages of rules, they are far from
finished, as contributing editor Randy Myers reports in our
cover story, Unfinished Business (page 38).
Dodd-Frank at Two
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PRUDENTIAL CAPITAL GROUP
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ACCESS TO PRIVATE CAPITAL.
Prudential Capital Group has consistently provided private
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As one of the largest buy-and-hold capital providers, we
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Direct access to $10 billion of senior debt and mezzanine
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1,000 middle-market company relationships locally and
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Seasoned expertise and local knowledge consistently provided
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To learn more about diversifying your sources of
private capital, visit www.PrudentialCapitalGroup.com/Diversify
2012. *As of 3/31/2012. Prudential Capital Group is a unit of Prudential Investment Management, Inc., a registered investment adviser and a Prudential Financial company. Prudential,the Prudential logo, the Rock symbol and Bring Your Challenges are service marks of Prudential Financial, Inc., and its related entities, registered in many jurisdictions worldwide.
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working. Jobs, and the skills needed
to perform them, are also changing,
so some jobs are becoming obsolete;
others are having some or all of the
tasks automated; and many jobs have
expanded the use of technology, thus
requiring workers to perform them in
new, and different, ways.
The anticipated drama of the baby
boomers exit hasnt really material-
ized, thanks in equal measure to the
poor economy, delayed retirement
plans, and unprecedented opportuni-
ties for older workers. While the age
wave may be hitting some industries
harder than others, the earlier con-
cerns simply havent come to pass. In
fact, many older workers have fared
better in the down economy than their
younger counterparts.
Dr. Katherine L. Y. Green
Green Consulting Group LLC
Chevy Chase, Maryland
wThe Bright Side of the Cloud
Cloud computing is a way that smallcompanies can allocate much-needed
resources to other, more beneficial top
drivers, such as sales and marketing
(Made for Each Other, June). When
smaller companies begin to realize that
software as a service is the best way to
manage data, they will see the inherent
benefit that the cloud presents.
Darrin Marion
Via E-mail
develop an integration process for the
postmerger period, a failure due to:
(1) not understanding how to achieve
revenue and cost synergies; (2) not re-
taining key employees and customers;
and (3) not understanding the corpo-rate culture of the acquired company.
Can a company right a poor post-
integration process? The answer is yes,
but it will cost a heck of a lot of share-
holder value. Although there remain
questions about the value of M&A,
companies today need to continue
making acquisitions in order to stay
competitive.
Richard Summo
Via E-mail
wAnother BurdenThe other burden, besides taxes, that is
even more significant to those affect-
ed is audits (Small Businesses Spend
wHow to Succeed at M&A
In my experience, the main reason formerger failures is poor management
in the postmerger integration phase
(Do Mergers Add Value After All?
Strategy, June). Most companies fail to
Stephen Webster
LETTERS
7cfo.com | July/August 2012 | CFO
Go to The Real Reason Companies Arent Investing on cfo.com to see howreaders responded to this post (and to add your own thoughts as well).
Its the Equity Risk Premium,StupidThere are plenty of justifications companies can give
for why they arent allocating capital to new projects
or buying assets, but most of them tend to be prettyvague. Uncertainty, whether due to the state of the
global economy, the European sovereign debt crisis,
or federal regulatory creep, is my least favorite excuse
that CFOs give.
The truth is, theres a far better apologia that com-
panies could present for not investing, and its rooted
in a classic principle of corporate finance. Im speak-
ing of the equity risk premium, a key ingredient in the calculations finance
departments make to decide whether to invest in a project. As Professor
Aswath Damodaran of New York University defines it, the ERP is the ex-
tra return that investors collectively demand for investing their money in
stocks instead of holding it in a riskless or close-to-riskless investment.
A key point is that the value of the ERP is affected by the entire stockmarket, not just the individual companys shares. So the overall risk aver-
sion of equity investors affects the ERP.
And therein lies the problem. In the wake of the financial crisis, the
Facebook IPO debacle, and developments in high-frequency trading, the
perceived risk of holding an equity portfolio has increased. Investors want
a higher return to compensate for the risk. The equity markets, as embod-
ied in the ERP, are dampening business investment.
BEST OF
THE BLOGS
VincentRyan
No Dire Straits
For Boomers
In regard to the worry
over baby boomers leav-
ing the workforce, the
institutional-knowledge
challenge is being solved
in many ways, and is cre-
ating less turmoil than projected by many business analysts
(When the Boomers Go, June). Many people age 50 and
over are staying on because they need, or want, to continue
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Send to:The Editor, CFO,51 Sleeper St., Boston, MA 02210,or e-mail us at: letters@cfo.complease include: Your full name, title, company name, address, andtelephone number. Letters are subject to editing for clarity and length.
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EDITORIAL INTERN
Bonnie Evans (bonnieevans@cfo.com)
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Russ Banham Randy Myers Alix Stuart
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CFO Research
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CONTRIBUTING RESEARCH EDITORS:
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Editorial Advisory Board
David W. Devonshire, EVPEVP/CFO Retired,
CFO, Motorola Inc.
Bruce Edwards, Chairman Emeritus,
Powerwave Technologies Inc.
David E. Farber, The RVH Group, Merrill Lynch
Frank R. Gatti, CFO & SVP, ETSJames C. Johnston, President, Johnston Co.
Stephen Payne, Americas Working Capital Leader,
Ernst & Young LLP
Albert A. Pimentel, CFO & COO, McAfee Inc.
Ellen B. Richstone, Former CFO, Rohr Inc.,
Sonus Networks, and Luminus Devices Inc.
Kenneth J. Sanginario, Principal, NorthStar
Management Partners
Debra Smithart-Oglesby, Former CFO,
First America Automotive
Editorial Offices
More Time on Taxes, Topline, June).
Sales-tax audits can be brutal, and
IRS audits can take months, a year, or
moreand large amounts of employee
and tax-attorney time.
Ronald J. Cappuccio, J.D., LL.M. (Tax)Via E-mail
COLI Is A-OKYour story Key-Person Insurance: A
Cash-Flow Caveat (May) provided
important information on this in-
creasingly popular tactic.
Corporate-owned life insurance
(COLI) has long provided numerous
benefits to shareholders and high-
producing, quality executives who
help to maximize shareholder value.COLI provides nonqualified plan spon-
sors with a cost-efficient asset that
offsets the liability of the participants
account balances on the plan sponsors
balance sheet. For example, plan spon-
sors can use COLI policies to mirror
the rate plan that participants earn in
their voluntary nonqualified deferred-
compensation plans. As a result, COLI
helps companies reduce future liabili-
ties, with an asset that should consis-
tently grow in value. And with non-qualified retirement plans increasingly
important for many executives earn-
ing more than $150,000 annually, COLI
facilitates effective asset-liability man-
agement.
Contrary to what is stated in the
articles last two paragraphs, there
was no 2004 regulation that led to the
COLI market being essentially dead
from 2004 to 2010. By contrast, COLI
has continued to grow in popularity
since that time. In 2004, the COLI BestPractices Provision was first proposed
and later became law as part of the
Pension Protection Act of 2006. The
measure and its high standards were
widely supported by the industrys
leading practitioners.
Mike Powers
Executive Director
The Todd Organization
Cleveland
8 CFO| July/August 2012 | cfo.com
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IBM, the IBM logo, ibm.com, Smarter Planet and the planet icon are trademarks of International Business Machines Corp., registered in many jurisdictions worldwide. Other product and service names might betrademarks of IBM or other companies. A current list of IBM trademarks is available on the Web at www.ibm.com/legal/copytrade.shtml. International Business Machines Corporation 2011. All rights reserved.
How a car dealer is driving a safer business.
As the world becomes more interconnected, threats and risks are growing exponentially. Fortunately, ona smar ter planet, we have the tools to help protect critical data and business continuity. Gruppo Intergea isa midsize company with about 460 employees that sells cars in Northern Italy. They wanted to improve thesecurity of their IT infrastructure a critical part of their daily operations. With help from IBM and its BusinessPartners, Gruppo Intergea implemented a smart security solution that can proactively scan their data acrosstheir network to identify threats and block them before they can damage business operations. So Gruppo
Intergea can be protected not only from known security threats, but also from other vulnerabilities that maynot have been on their radar. As a result, their network can stay up, and their data stays safer. To see how IBMand its Business Partners can help your midsize business work smarter, visit ibm.com/engines/auto.Lets build a smarter planet.
Midsize businesses are the engines of a Smarter Planet.
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PRUDENTIAL RETIREMENT
ITS TIME TO
RETHINK RISK.
2012. 1Based on fund sponsor rankings in Pensions & Investments, February 2011. 2Pensions & Investments2011 Annual Money Managers Directory. 3LIMRA Group Annuity Risk Transfer Survey, 1Q12. Guarantees arebased on the claims-paying ability of the insurance company and are subject to certain limitations, terms andconditions. Products issued by The Prudential Insurance Company of America (PICA), Newark, NJ 07102.Prudential, the Prudential logo and the Rock symbol are service marks of Prudential Financial, Inc. and itsrelated entities, registered in many jurisdictions worldwide.0202597-00001-00
WE CAN HELP YOUR DB PLANMEET THAT CHALLENGE.
PENSION PLAN RISKS ARE UNPREDICTABLE.Market risks
remain top of mind in a rapidly changing economic
environment. But asset/liability mismatch, rising life
expectancy and changing regulations will likely increase
volatility in the long run.
NOW IS THE TIME YOU AND YOUR ADVISORS NEED A
TRUSTED PARTNER. At Prudential, were leading the waywith innovative risk transfer strategies, from a separate
account product that closes out pension liabilities, to
flexible new solutions for underfunded plans that enhance
participant security.
OVER 135 YEARS, WEVE KEPT OUR PROMISESthrough
sound money management and superior financial
strength. For strategies that meet the challenges of
managing pension risk, Prudential is the company more
and more plan sponsors and advisors rely on.
PRUDENTIAL FINANCIAL
Currently manages assets for 23 of thelargest 25 corporate plans1
$118 billion in DB assets2
7th largest DB money manager2
2nd largest manager of US
pension buy-outs3
5th largest active institutional manager
of US fixed income2
To arrange a free market
assessment of your
organizations
pension risk, contact
Glenn OBrien, Managing
Director, Prudential
Pension & Structured
Solutions, at 860-534-2440.Download
our white paper on new DB solutions
at www.prudential.com/pensionrisk
PRUDENTIAL FINANCIAL
KEEPING PROMISESNew solutions for retirement benefit obligations
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The U.S. Supreme
Courts ruling that
upheld the constitu-
tionality of virtually
the entire Patient Protection
and Affordable Care Act will
have major repercussions
for businesses as they weigh
whether to change their em-
ployee benefit plans over thenext two years.
Many companies expect-
ed the court to strike down
the individual mandate, a
decision that could have un-
raveled the entire law. But
in a 5-4 decision issued on
June 28, the court ruled that
the mandate, which requires
most U.S. citizens to obtain
some health coverage if they
dont have it, is constitu-
tional because it falls under
Congresss taxing powers.
The court did strike down
part of the law, ruling that
states have the option to
keep their current Medicaid
funding even if they decline
to expand their Medicaidprograms.
Starting in January 2014,
firms with more than 50 em-
ployees that forgo providing
health insurance to full-time
employees will be required
to pay a no coverage pen-
alty. That per-employee
penalty, however, will be
less than what virtually all
employers currently payfor providing health insur-
ance. Employees that do not
receive insurance through
their companies may be able
to purchase it through fed-
erally subsidized insurance
exchanges in each state.While the courts deci-
sion creates some certainty
for companies, CFOs ini-
tial reaction to the law was
largely unfavorable. Some
worried that the law opens
the door for more federal
regulation, which they said
is preventing businesses
from investing in expansion.
They also said the complex-
ity of the law will make ithard to calculate the cost of
hiring additional employees
as they enter into the bud-
geting process for 2013.
Despite the ruling, the
Affordable Care Act is sure
to remain a contentious is-
sue both in Congress and
in the upcoming November
elections. VINCENT RYAN
ToplineSTATS
OF
THE
MONTH
Kevin Dietsch/Landov
HEALTH CARE
Annual rate of salesof new homes inMay, the highestmonthly rate sinceApril 2010.
369K
Rise of new autosales in June froma year earlier.
22%
Increase in ordersfor durable goodsin May, after twoconsecutive monthlydecreases.
1.1%
High Court UpholdsHealth-Care ReformThe Supreme Courts ruling leaves companies with decisions to make.
Protesters and supporters gath-
er in front of the U.S. Supreme
Court as they await a ruling on
the Affordable Care Act.
Sources: U.S. Census Bureau,
Autodata Corp.
11cfo.com | July/August 2012 | CFO
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Topline
BOOKSHELF
THE BEST IS
YET TO COME
Do you ever throw
down your newspaper or
iPad in disgust after read-
ing the latest news about
jobs or budget deficitsand fret about the inevi-
table decline of the United
States? Stop worrying,
advises Daniel Gross, the
economics editor of Yahoo
Finance. In his new book,
Better, Stronger, Faster:
The Myth of American
Decline...and the Rise of
a New Economy(Simon &
Schuster, $26), Gross as-
sures us that our current
economic slump is just atemporary setback. Were
not Japan or the British
Empire, he says, nor is
China quite the juggernaut
that its cracked up to be,
for that matter. Bad things
have happened to the U.S.
economy many times be-
fore, yet it always emerg-
es from the experience,
well, better, stronger, and
faster.
Restructuring is a corenational competency,
Gross declares, pointing
out that the United States
rebounded faster from the
Great Recession than its
peers. Drawing on his ex-
tensive travels in the U.S.
and abroad, Gross pres-
ents much evidence of
new green shoots of pros-
perity.CFO
After months of heat-
ed debate, the Fi-nancial Accounting
Standards Board and
the International Account-
ing Standards Board split
their differences in June,
deciding to allow compa-
nies to account for lease
expenses on the balance
sheet using one of two ap-
proaches, depending on
the type of lease. The two
methods the standards-setters agreed on were the
right of use approach
(Approach A) and the
whole-contract method
(Approach D).
The two approaches differ greatly
from each other, but together they seem
to satisfy a variety of constituents, as
well as the boards. Approach A takes the
right-of-use
asset of a lease and amor-
tizes it in a straight-line fashion, while
Approach D lets the lessee allocate leasepayments evenly throughout the lease.
The boards decision clarifies how to
account for equipment leases and real es-
tate leases: equipment leases should fall
under the right-of-use approach, and real
estate leases should fall under the whole-
contract method. In earlier discussions
at the joint board meeting,
FASB originally opted for atwo-method model and the
IASB favored a one-method
model. But after a second
vote, both boards agreed on
the dual approach.
Several market partici-
pants say they would wel-
come the combination of
the two approaches. I be-
lieve it is the approach that
will appeal to the greatest
number of people affectedby the standard, says Dee
Mirando-Gould, a former
associate chief auditor with
the Public Company Ac-
counting Oversight Board and now direc-
tor at MorganFranklin, a business consult-
ing and technology solutions firm. The
two-lease model is closer to the econom-
ics of leases in that some leases transfer
ownership rights [for which the whole-
contract method is best], while others
merely transfer a right of use, adds BillBosco, president of lease-accounting firm
Leasing 101 and a member of a FASB/
IASB working group that provides input
to the boards.
FASB and the IASB will publish a joint
exposure draft on the topic in the fourth
quarter of 2012. KATHLEEN HOFFELDER
LEASING
Two Ways about ItFASB and the IASB have agreed to allow two approaches toaccounting for lease expenses on the balance sheet.
IN
SEARCHOF THE
NEXT
BIG
THING
Is a percentage of your firms
budget invested in pursuit of
major innovations?
How much of the innovation
work is your firm doing?
Yes No
39% 61%
Transformational
Moderate
Incremental
44%
24% 32%
15%If yes, what percentage?
I believe it is theapproach that willappeal to the greatest
number of people af-fected by the standard.
Dee Mirando-Gould,
formerly of the PCAOB
Source:
Duke University/
CFOMagazineGlobal Business
Outlook Survey12 CFO| July/August 2012 | cfo.com
7/26/2019 CFO - 2012 July August
15/64
from last year.
But not all is doom and
gloom, according to Jim
Morrison, CFO of plastics
compounding firm Teknor
Apex and chair of the
AICPAs Business Indus-
try Executive Committee.
Morrison does not con-
sider the 2-point drop thatdire, considering the index
has dropped 9 to 10 points
in some years. We might
have been in a holding pat-
tern for a while, but we are
going to resume growth,
Morrison says. It may not
happen right away. Theres
still optimism that over the next year, we
will be on a growth pattern rather than a
downward spiral. K.H.
CFOs looking for a promotion
may take heart from the latestannual survey of CEO succes-
sion from consultancy Booz &
Co. Last year, the percentage of top
bosses who departed the worlds 2,500
largest companies rose to 14.2%
thats 355 CEOs who moved outfrom
11.6% in 2010.
The improved outlook for the econ-
omy may be partly responsible for the
acceleration in CEO turnover. Boards
are increasingly seeking new leaders
to help drive growth in a recoveringglobal economy, the survey authors
write. But theres at least a hard bar-
gain, if not a catch: the need to ride the
upswing places a distinct burden on
those newly elevated CEOs to prove
More
CEOs Go
A majority of executives surveyed by
the American Institute of Certified Public
Accountants in the second quarter said
their companies have enough cash or
have increased their cash this year, but
they remain reluctant to deploy it.Forty-three percent of the 1,250 senior
executives in the AICPA Business and
Industry Outlook Survey said their com-
panies have about the right amount of
cash currently, while 36% said cash as-
sets have increased from the first quar-
ter to the second quarter of 2012. Almost
half of those surveyed were CFOs, while
22% were controllers. Sixty-nine percent
represented privately owned firms.
But 24% of the total respondent base
said they were hesitant to
deploy their excess cash, an
increase from 20% who felt
that way last quarter. Only
12% said they would actu-
ally use it.The reluctance to spend
cash may stem from an
overall negative take on
the economy. The AICPAs
CPA Outlook Index dropped
two points, to 67 from 69,
from the first quarter of
2012 to the second. Similar-
ly, expectations for revenue, profit, and
employment growth slid this quarter,
though they were essentially unchanged
Have Cash, Wont Spend
24%of those surveyed
said they were hesi-
tant to deploy their
excess cash, up from
20% last quarter.
themselves early in their
tenure.
Overall, 2.2% of CEOs
lost their jobs because of
merger-and-acquisition ac-
tivity, 2.2% were forced out
for other reasons, and the re-
maining 9.8% planned their
departures.
Good news for CFOswith their eye on the CEO
role: so-called insider CEOs,
those promoted from with-
in the firm rather than ap-
pointed from outside, serve
longer and, more important,
create more value for share-
holders. From 2009 to 2011,
these CEOs firms outper-
formed local market indexes by 4.4%,
compared with 0.5% for external CEOs.
The bad news: those insider promo-tions are harder to get. In 2011, 22% of
CEOs were appointed from outside,
compared with just 14% back in 2007.
The Booz survey makes no mention
of the role of CFOs in succession plan-
ning. It does, however, carry advice to
newly appointed CEOs from Andre-
Michel Ballester, CEO of the Italian
company Sorin Group: The first is-
sue is to create a leadership team very
quickly, making decisions on who are
the keepers and who are the leavers in
the first few weeks.
And therein lies a warning: CFOswho dont get the top job themselves
should quickly cement their relation-
ship with the successful CEO candi-
date. In fact, recent research by recruit-
ing firm Korn/Ferry suggests that 28%
of CFOs leave their company within
two years of an external CEOs ap-
pointment. If another internal candi-
date gets the CEO role, there is only a
10% chance the CFO will leave for new
pastures. ANDREW SAWERS
HUMAN CAPITAL
CASH FLOW
13cfo.com | July/August 2012 | CFO
-0.6%
-2%
0
2
4
6%
Insider Outsider
-1.3%
3.9%
5.1%
3.6%
2.2%
4.4%
0.5%
09-1106-0803-0500-02
Source: CEO Succession Report: 12thAnnual Global
CEO Succession Study (Booz & Co.)
The Insiders EdgeMedian shareholder returns of companies
where the outgoing CEO had been promoted
from within vs. recruited externally.
The bad news: insiderpromotions are harderto get. In 2011, 22% of CEOswere appointed from out-side, up 8% from 2007.
Thinkstock
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16/64
Topline
Even employees who have tra-
ditional pensions will be work-
ing longer than they planned
and their bosses know it.In a recent survey con-
ducted by CFO Research in
collaboration with Prudential
Financial, about 70% of senior
finance executives said they
believe their companies em-
ployees will be forced to delay retirement because of insufficient
savings. (CFO Research and Prudential conducted similar surveys in
2009 and 2010.) The 186 finance executives surveyed work at large
and midsize companies, all with defined-benefit (DB) pension plans
with assets of at least $250 million. Employers also said that employ-
ee benefits are critical to attracting and retaining talent, with three-quarters agreeing that employee satisfaction with benefits is impor-
tant to the success of their company.
So whats a CFO to do? The survey suggests that finance execu-
tives are exploring new ways to manage those financial risks that
pose threats to both a companys bottom line and an employees
nest egg. This years survey found an increase in the percentage of
companies likely to transfer DB plan risk to a third-party insurer.
Because pension plans are guaranteed, employers have to pay extra
if the investments underperform. With that in mind, we are fig-
uring out a way to move future risks off of our companys balance
sheet, said the CFO of a health-care company. While only 5% of
respondents had transferred DB plan risk to a third-party insurer,43% said they were likely to do so within two years, up from 30%
in 2010.
Finance executives in the study also said they will explore prod-
ucts that can dampen the markets volatility and encourage employ-
ees to keep their own investments in defined-contribution plans
intact. These executives are becoming more interested in exploring
how using strategies such as target-date funds, stable-value prod-
ucts, and guaranteed-income products might help bolster employee
retirement investments. JOSH HYATT AND DAVID OWENS
RETIREMENT PLANS
To download the report, The Future of Retirement and
Employee Benefits, go to www.cfo.com/research
Retirement:
A Recalculated Risk
If you would like to submit a question to Bill
MrExcel Jelen, go to CFOs Spreadsheet
Community Center at www.cfo.com/spreadsheets.
A RefreshingChangeQ: Ive discovered that
some of the underlying
data in my pivot table is
wrong. After I correct a
number, the pivot table
does not appear to include
the change. Why does thishappen, and how do I hold
on to my updates?
A: There is an important concept to understand
about pivot tables: When you create a pivot
table, all the data is loaded into memory to allow
it to calculate quick-
ly. Changing the
data on the original
worksheet does not
automatically up-
date the pivot table.
You need to se-
lect a cell in the
pivot table. The Piv-
otTable ribbon tabs will appear. On the Options
tab, click the Refresh icon to recalculate the pivot
table from the worksheet data (see Figure 1). The
result should be that the pivot table is updated.
One word of caution: Making changes to the
underlying data could cause the table to grow.
For example, if you reclassify some records from
the East region to the Southeast region, be awarethat clicking the Refresh button will cause the
table to grow by one column. If there happens to
be other data in that column, Excel will warn you
and ask if it is okay to overwrite those cells.
AskMrExcel
Bill Jelen
Figure #1
AnticipatingDelaysMore than
two-thirds ofCFOs expectemployees tohave to putoff retirement.
0%
20
40
60
80%
Dont KnowNoYes
14%17%
69%
14 CFO| July/August 2012 | cfo.com Thinkstock
7/26/2019 CFO - 2012 July August
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Wind-project developers or solar-
facility owners typically have tax-eq-
uity partnerships with large-companyinvestors such as Google or Chevron,
where both sides benefit: the develop-
ers get necessary capital and the inves-
tors get big tax write-offs. Corporate
investors in wind, geothermal, and bio-
energy projects are currently eligible
for the production tax credit (PTC),
which provides an income-tax credit
of 2.2 cents per kilowatt hour for up
to the first 10 years a facility is open.
They can also take the investment tax
credit (ITC), a one-time tax break of30% on their investments, or an equiv-
alent cash payment from the U.S. Trea-
sury Department.
But sooner or later, that could all
change. The PTC for wind projects,
which companies can exchange for a
cash grant, is set to expire at the end
of this year, while the geothermal and
other bioenergy PTCs expire at the
end of 2013. Treasurys 1603 grant,
which provides cash payments worth
30% of the total cost of a renewableproject, is also phasing out. Named
after Section 1603 of the American
Recovery and Reinvestment Act of
2009, the grant is now available only
to projects that began construction in
2011. Solar ITCs, meanwhile, are set to
expire in 2016.
The uncertainty surrounding the
renewable-project market is already
slowing project development. Some
participants are hopeful that Congress
will extend the credits at the 11thhour,
but typically, when lawmakers do re-
new these credits, they tend to extendthem for no more than a year or two.
Demand for tax-equity financing
already exceeds the supply of funds
available. Only $3.6 billion in tax-equity
funds will be available for renewable-
energy projects in 2012, but the demand
for renewable-project financing in 2011
was $7.5 billion, according to an Ameri-
can Council on Renewable Energy
survey last year. That source of capi-
If long-standing renewable-energy credits expire as
scheduled starting this year, companies that have
taken advantage of those hefty tax breaks for wind and solar
financing will have to consider new alternatives.
Renewed Concerns
About RenewablesKey tax credits for investments in renewable-energy projects couldsoon begin to expire. By Kathleen Hoffelder
Ferran Traite Soler
ACCOUNTING
& TAX
tal that is helping the industry grow
is going to slow down if those incen-
tives are not there, says Brent Stahl,
principal and partner at law firm Stahl,
Bernal & Davies. In fact, thats already
happening, as only those wind projects
already under way are
still receiving the tax
credits.Investors have
been lured to the
projects in the past
few years, when the
tax savings increased
dramatically. The
cash-on-cash return
that a firm is paying
a tax-equity investor
may be 3%, but in sub-
stance the tax-equity
investor is earning avery high return be-
cause its using these
tax attributes to shel-
ter or reduce the tax
burden on [its] other
income, says Mark
Regante, a partner at
law firm Milbank, Tweed, Hadley &
McCloy. In the case of accelerated-
depreciation deductions, the benefit is
like an interest-free loan from the gov-
ernment.
Before the recession, investors in
solar facilities were earning a 6% to
8% aftertax internal rate of return;
The uncertainty surrounding the
renewable-project market is already
slowing project development. Some
are hopeful that Congress will extendthe tax credits at the 11thhour.
15cfo.com | July/August 2012 | CFO
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The Most Respected Companies
in North America Trust Ryan
l 1
1 ll
2012 Ryan, LLC. All rights reserved.
Business-Minded Tax Consultants
Ryan provides the most innovative approach to tax consulting available in the industry
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7/26/2019 CFO - 2012 July August
19/64
Thinkstock
The Second-
Greatest RiskCFOs of multinationalcompanies rank transfer-pricing risk just behindglobal compliance.
Multinational CFOs are increasing-
ly looking to avoid the double taxa-tion that can occur from manufactur-
ing a product in one jurisdiction and
selling it in another. Transfer pricing,
the movement of goods and services in
order to allocate profits, has become
a high-ranking concern for finance
chiefs of multinational companies, ac-
cording to a survey by Alvarez & Mar-
sal Taxand.
Thirty percent of the 60 large-
company senior finance executives
surveyed ranked transfer pricing astheir greatest risk, just behind global
compliance, at 32%. Transfer pricing
now they can reap an IRR
of more than 10% on the
renewable deals. If the tax
credits expire, however,
other alternatives for in-
vesting in renewable proj-ects could become more
popular. For example,
market participants have
started to discuss a master
limited partnership as a fi-
nancing vehicle, similar to
the model for pipeline busi-
nesses, says Stahl. The con-
cept would be a first for the
renewables sector.
Already-existing tax-
was also the second-highest risk for
the respondents from 158 smaller com-
panies with less than $1 billion in an-
nual revenue, with 20% saying transfer
pricing was their greatest risk, com-
pared with 23% who named global
compliance.
Once something goes wrong in
the transfer-pricing area, it becomes a
huge controversy very quickly, espe-cially if there are two countries in-
volved, says Kent Wisner, managing
director of international tax at A&M
Taxand. Even in a lower tax jurisdic-
tion like Ireland, they need tax revenue
just like the United States does.
Staying one step ahead of the tax
penalties that may accompany trade
distortions involving tangible or in-
tangible assets, for example, is a key
concern of businesses today. The risks
become more pronounced as merger-and-acquisition activity picks up.
Once a physical transfer-pricing
equity structures could
also draw new interest.
Sale-leaseback structures,
where a developer sells
a project to an investor,
could prove useful for in-vestors with short-term
horizons. And inverted-
lease structures that let
an investor lease a proj-
ect directly from a devel-
oper could also become
more popular, say market
participants. Similarly,
accelerated-depreciation
federal-tax incentives, in-
cluding credits for solar-
project investments that extend over
a five-year period, are not expiring yet
and could be more appealing with the
traditional credits going away, Stahl
says. So far, relatively few companies
have taken advantage of these incen-tives.
Interest in these alternatives varies
by market. The wind sector may need
more investor support, but the solar
industry is better equipped to stand
on its own because of its retail appeal,
says Milbanks Regante. There are
more tax-equity investors in the solar
market now than a year ago, he says,
and developers are finding ways to get
their projects financed. CFO
$7.5billionDemand forrenewable-energy
project financingin 2011
$3.6billionTax-equity financ-ing available forrenewable-energyprojects in 2012
Source: American Council
on Renewable Energy
FINANCING
SHORTFALL
structure is in place at a company,
however, keeping it operating often
becomes less of a burden to financial
executives, according to A&M Tax-
ands survey. Only 7% of the largest-
company executives surveyed saw
transfer pricing as a burden to their
ongoing operations. The survey in-
cluded responses from more than 300
financial executives, with more than70% representing smaller companies.
K.H.
Even ina lower taxjurisdic-tion likeIreland,they needtax revenue
just like the U.S. does.
Kent Wisner, A&M Taxand
THOSE LOVELY INTANGIBLES
The fact is that it is simply very difficult to identify or measure intangible
assets. High market-to-book ratios may provide indications of their existence
and value. However, after the excesses of the dot-com bubble, there is under-
standable reluctance to record them on the balance sheet.
Hans Hoogervorst,IASB chairman, in a June 20 speech
Verbatium
ACCOUNTING & TAX
17cfo.com | July/August 2012 | CFO
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Finding Life after DebtAn acquisition saves a software company from crushing leverage. By Vincent Ryan
Miguel Davilla/theispot
CAPITAL
MARKETS
approaching 10 times was off the ta-ble, says Samuelson.
By December 2010, Infor had a new
management team and profits were
growing again. But that didnt solve
the capital-structure problem: Infor
was still more than nine times lever-
aged. The company considered sev-
eral options for right-sizing its capital
structure and chose one true to its his-
tory: acquire a company that Infor and
Golden Gate could overequitize and
combine with Infor to bring leveragelevels down, Samuelson says.
Lawson to the Rescue
Publicly held Lawson Software, with
$800 million in revenues, had the scale
to help fix Infors capital structure. But
a take-private transaction for Lawson
still would not have brought Infors le-
verage down to a level that was palat-
able in the capital markets, says Sam-
uelson. And as the company was tryingto close the deal in 2011, the earthquake
in Japanese occurred and the euro-
zone crisis flared up, making the debt
markets difficult again.
As a result, Golden Gate Capital
financed the $2 billion Lawson unso-
licited takeover separately and kept
the company a stand-alone entity. But
the PE firm eventually combined the
companies this year, after it and Sum-
mit Partners kicked in $1 billion of new
equity. Infor used $600 million of thatsum to pay down debt. At the same
time, Infor obtained a $3.4 billion first-
lien bank loan and raised $1.9 billion
in a public bond issue, one of the larg-
est post-credit-crunch refinancings in
high tech.
Those transactions lowered the le-
verage of the combined Infor-Lawson
to 6.5 times EBITDA. The addition of
Lawsons cash flow also helped. Infor
Acquisitions have killed many companies, but Informay be one of the few saved by one. Leveraged to the
hilt two years ago, the company, which makes enterprise-
resource-planning software, has returned from the brink of
a major restructuring. A merger with fellow ERP software
recalls Samuelson; the debt was in-
credibly inexpensive, and we could get
as much as we wanted. So Infor went
from financing acquisitions almost en-
tirely with equity to a more tradition-
al leveraged-buyout-type capital struc-
ture, he says.The companys pro forma lever-
age after the 2006 deals was 6.5 times
EBITDA (earnings before interest,
taxes, depreciation, and amortization).
Then the economy nose-dived, and
Infor suffered large declines in EBIT-
DA and profits, pushing its leverage to
10 times EBITDA. Although servicing
debt was never an issue, the ability
to refinance debt certainly at anything
vendor Lawson Software, combined
with an injection of equity capital, was
the key factor in Infors revival.
I think a lot of people thought
the endgame would be bankruptcy or
some kind of negotiated restructuring
with existing lenders, says Infor CFOKevin Samuelson. But Infor avoided
that outcome.
How did Infor get so deep into
debt? In 2006, it was a four-year-old
company owned by private-equity firm
Golden Gate Capital and humming
along at a good clip. But that year it
spent $2.5 billion on acquisitions in a
short period of time. The credit mar-
kets had opened up to software firms,
18 CFO| July/August 2012 | cfo.com
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21/64
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Stephen Webster
now has a window of six years be-
fore any meaningful maturities and
$350 million to $400 million of free
cash flow after debt service. The com-
pany is now looking to spend heavily
in international markets in the next 18months, and going public is also on its
radar screen. With the proceeds of an
[initial public offering], we could pay
down debt and get to a more normal-
ized public-company debt level, says
Samuelson. For Infor, at least, there is
life after debt. CFO
Private EquitysPicky AppetitePE firms are craving
service and health-caretargets, accordingto a new survey.
Private-equity firms have been
choosy investors this year, express-
ing a preference for service and health-
care companies for potential takeovers
and greater portfolio exposure. Ac-
cording to financial sponsors, both in-
dustries will provide superior value in
the current economic climate.
The second-quarter Rothstein Kass/CFOMidsize Private-Equity Firm Ba-
rometer surveyed PE firms with assets
of $150 million to $1 billion and found
that 52% of deals these firms completed
so far in 2012 were in the service sector.
Health care, including pharmaceuticals
and biotech, came in second, at 31%.
A substantial chunk of the 85 PEfirms polled said they were weighing
service-industry deals, particularly
in the IT services, financial services,
and insurance subsectors. When asked
about catalysts for service-sector value
creation, 41% of survey participants
said service firms will get a lift from
the recovering economy this year. The
service sector is also offering reason-
able valuations and plentiful deal op-
portunities, participants said.
On the health-care front, a major-ity of the PE managers (61%) said they
had either increased their holdings in
health care, were weighing deals, or
were investigating future investment.
By subsector, 34% of those surveyed
cited instruments and supply compa-
nies as targets; about 28%, diagnostics;
just under 24%, home health care; and
about 22%, appliances and equipment.
The PE managers surveyed were
mostly unified about what will spur
value creation in health care: the agingpopulace. Health care is rapidly evolv-
ing, with advances in everything from
cancer-fighting drugs to noninvasive
diagnostics and health-care analytics,
says Jeff Somers, a principal in the
private-equity group practice at Roth-
stein Kass. These diverse and innova-
tive companies offer a wealth of op-
portunities to PE firms looking to take
nascent technologies to the next level.
Of course, by focusing too much on
services and health care, PE firms couldsow the seeds of lower returns. Somers
warns that a clustering of deals in
BIG DOGS IN DERIVATIVES
Six financial-services firms account for
an excess of 75% of derivative assetsand
liabilities carried on the balance sheets
of a cross-industry sample of 100 U.S.
companies, according to Fitch Ratings.
The firms are JPMorgan
Chase, Bank of America,
Goldman Sachs, Citi-
group, Morgan Stanley,
and Wells Fargo.
The notional amount
of all derivatives held
by the 100 companies
was about $300 trillion
at year-end 2011.
Editors
Choice
services or health care could have an
impact on deal flow and valuations.While PE firms are optimistic about
opportunities, the deals in front of
them obviously havent been com-
pelling enough to move them off the
M&A sidelines. The vast majority of
the 85 funds in the Rothstein Kass
survey have closed one or no deals to
date in 2012. Thirty-five percent have
closed two to three deals, and 11% have
done four to five transactions.
Rothstein Kass, a provider of pro-
fessional services to alternative invest-ment firms, polls PE fund managers
quarterly. V.R.
CAPITAL MARKETS
Source: Second-quarter Rothstein Kass/CFO
Midsize Private-Equity Firm Barometer
Top three reasons service companies
will provide value in 2012
Lift from
improving
economy
Reasonable
valuations
Plentiful
opportuni-
ties to do
deals
0%
20
40
60
80%
41% 38% 33%
Top three reasons health-care
companies will provide value in 2012
Aging
populace
Innovation in
drugs, treat-
ment, or
diagnostics
Health-care
legislation
0%
20
40
60
80%66%
33%22%
Where the Deals ArePE firms say service andhealth-care companies are thebest bets for 2012.
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Now, Lipschitz is hoping his win-
ning streak will continue at Make
Meaning, a start-up experiential re-
tail chain where he is finance chief. At
Make Meaning stores, customers de-
sign, decorate, and make the productsthey buy, whether candles, jewelry,
stationery, soap, or other crafts.
Experiential retail, says Lipschitz,
draws customers to stores by provid-
ing a hands-on, interactive experience
that they cant get elsewhere, includ-
ing (and especially) the Internet. The
idea isnt new; many chains have in-
corporated experiential retail into
their stores for years. Customers at
L.L. Beans flagship store in Freeport,
Maine, can take kayaking, archery, and
fishing classes. Children marvel at the
lifesize toy soldiers and giant floor pi-
ano at the FAO Schwarz store on Fifth
Avenue in Manhattan. Other chainsoffering experiential retail include
American Girl, Lego, and Apple.
But Make Meaning is taking the idea
a step further. Although its stores do
sell cards, candy, and other products
for children, most of its business comes
from customers crafting their way to
the cash registerwhether putting
decorations on cakes, brushing paint
onto ceramics, or melting wax into can-
dles. And thats the whole point.
There is a big difference between
doing something for the experience,
which really is kind of the pottery-
store model, versus doing something
with a commerce objective in mind,
and basically letting you personalize
your product, says Sucharita Mul-
puru, retail analyst at Forrester. It
sounds like these guys are about activ-ity first and commerce after.
Crafting a New Business
Since its launch less than two years
ago, Make Meaning has opened four
storesin Manhattan; Scottsdale, Ari-
zona; and Dedham, Massachusetts, a
Boston suburb. So far it has seen more
than 300,000 visitors, and 12,000 peo-
ple have signed on as members, at an
annual cost of $36 for individuals and$149 for families. The firm now has
about 200 employees, and though Lip-
schitz wouldnt disclose sales numbers,
he says they have
exceeded manage-
ments expecta-
tions.
Like all growing
companies, Make
Meaning has had to take risks. One of
the biggest: offering so many activities,
each requiring niche expertise, un-der one roof. To keep things operating
smoothly, the company has hired top-
tier consultants, such as Elisa Strauss of
Confetti Cakes, a well-known Manhat-
tan bakery. Make Meaning is also staff-
ing its corporate office with entertain-
ment-industry experts, including vice
president of operations Don Watson,
who held the same title at the House of
Blues chain of music clubs.
When Wayne Lipschitz was controller of Wolfgang
Puck Worldwide, the firm grew from 12 units to more
than 20. As controller of The Cheesecake Factory, he helped
the chain grow from 19 restaurants to over 40. And during
his time there as CFO, the Coffee Bean & Tea Leaf chain
grew from fewer than 100 stores to more than double that.
Images courtesy of Make Meaning
GROWTH
COMPANIES
Hands-On GrowthThe finance chief of Make Meaning says the start-up has what it takes to
bring customers through the door. Can it keep them coming back?
By Marielle Segarra
Visitors decorate
cakes and watch
their candles
cool at a Make
Meaning store.
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Most Fortune100 companies have substantial formal
programs for educating their top finance talent, and
Dell is no exception. But the Round Rock, Texas-based
computer giant may have a slight edge, thanks in part to its
use of a simple tactic.
Bloomberg/Getty Images
HUMAN
CAPITAL
Training at Dell:Here, There, and EverywhereThe computer giants financial-education programs rely on a mix of long-distance
and local learning. By David McCann
I dont know of anoth-
er company that combines
the two approaches, says
Tom Conine, founder of
TRI Corp., which helps
large companies design,develop, and implement
financial-education pro-
grams (Dell is a client). Going for-
ward, decision-makers have to be able
to work both virtually and face-to-
face, and the team dynamics of the two
are very different, says Conine. He
credits the dual approach to Dell CFO
Brian Gladden and Alicia Davis, the
companys director of global finance
learning and development.
The approach supports three edu-
cation programs, geared toward fi-
nance professionals with varying lev-
els of experience. In addition to the
FDP, there is the Financial Rotation
Program (FRP), for top talent with 5
to 7 years experience, and the Global
Financial Excellence Program (GFEP),generally for those with 10 to 12 years
experience who have just received or
are about to receive their first execu-
tive appointments.
Learning ThroughSimulationsDells educational effort began in 2009,
though the programs are still consid-
ered new in the companys culture.
These are contemporary programs
that deal with the realities of today,says Gladden. To that end, all three
programs feature simulations, in which
participants form teams that make
business decisions for hypothetical
companies.
The simulations in-
crease in complexity from
one program level to the
next. They require partici-
pants to make decisions rel-
ative to the entire business,
about pricing, production,cost, new products, market
direction, and more. Simu-
lations are effective because you learn
by doing, observes Conine. When
you do that, you make mistakes that
you learn a lot from. The simulations
are also competitive, and most finan-
cial people thrive around that.
The simulations force participants
to work under four different types of
These are contem-porary programs
that deal with therealities of today.
Brian Gladden,
CFO of Dell
Almost all companies of Dells size
are globalized, and most try to homog-
enize their training programs as much
as possible. They generally educate
their employees in one of two ways:
either virtually via the Internet or inclassrooms scattered around the world.
Dell, however, uses both of those meth-
ods. For example, for the third and
fourth semesters of the companys Fi-
nancial Development Program (FDP),
a two-year program for high-potential
recent college graduates and under-
graduate interns, teams work virtually
for several weeks and then convene for
a week in Austin, Texas.
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stress. They have to deal with time
pressure, limited information, scarce
resources, and divergent opinions from
teammates. When you mix those ele-
ments together, observes Conine, it
makes for real-world decision makingunder conditions of uncertainty. The
simulator runs the various decisions
made through an econometric model
and spits out hard-number results.
In addition to the simulations, the
FDP calls for participants to rotate
among roles that include segment and
operating-expense analysis, intercom-
pany accounting, cash-management
analysis, pricing, corporate planning,
competitive analysis, financial services,
credit analysis, external reporting, bud-geting and forecasting, and logistics.
About 50 employees are enrolled
each year in the entry-level FDP,
which lasts two years. FDP graduates
branch off to internal audit or finance
roles. Within three years, they are eli-
gible for consideration in the Financial
Rotation Program. That lasts for three
years, with three different one-year as-
signments, many outside participants
home countries. Roles include investor
relations, assistant controllership, pro-curement (where a person would be an
analyst for a commodity buyer), opex
roles such as supporting the marketing
budget, financial planning and analy-
sis, treasury, foreign exchange, and
cash management.
There is also a tax role, which Davis
calls relatively unique to our rotation,
to understand not necessarily how to
do an accrual but how value-added tax
or transfer pricing works. Participants
dont necessarily choose which assign-ments they get, she adds, but they can
express a preference.
Thinkstock
IT PAYS TO BE PUBLIC
Three out of four CFOs (74%) received a raise in 2011, according to a survey
by Grant Thornton and the Financial Executives Research Foundation.
The average salary increase was 4%, compared with 3% in 2010. Public-
company CFOs received an average base salary of $286,500 last year, versus
$197,400 for private-company finance chiefs.
Editors
Choice
tion to certain nonfinancial-employee
groups. People from marketing, sales,research and development, and infor-
mation technology will take four mod-
ules built around the income statement,
the balance sheet, factors affecting
profitability, and key financial ratios.
As a result of the programs, Dell is
now more consistently focused on a
core set of operational financial tools,
says Gladden. A good example is in-
come variance, driving a consistent set
of tools across the firm to measure the
results of our business units, he says.Can the return on Dells investment
in the educational programs be quanti-
fied? Gladden says they pay for them-
selves through less reliance on recruit-
ers to find talent. Since he came to Dell
as CFO in 2008, Gladden has tried to
instill in his top staff the mind-set that
they are building a 25-year career at
the company, rather than just joining
to get a certain set of experiences to
make you more attractive in the ex-
ternal market, he says. This is aboutdeveloping a culture and leadership
capabilities for the long term. CFO
Studying
Financial ExcellenceAt the third program level, the Global
Financial Excellence Program, partici-
pants do benchmarking work at other
companies, which are selected based
on their reputation for maintaining
best practices. The Dell employees
work with the CFO and finance staff to
understand how the issues those com-
panies are dealing with relate to Dell.
In turn, those companies send finance
staffers to Dell for similar learning.
The GFEP participants also work ona team project; they deliver the results
to Dell chairman and CEO Michael
Dell. Last years project focused on
purpose-driven companiesthose
companies that execute against strate-
gies that are clear, concise, and brand-
ed. Key take-aways included how ev-
ery team member lives the brand at
Coca-Cola, how the business-integra-
tion processes at Stanley Works func-
tion, and how executives are involved
in recruiting at Goldman Sachs.Meanwhile, Dell is developing a
program to provide financial educa-
EDUCATING DELL
Financial training at Dell comes in three parts.
FINANCIAL DEVELOPMENT PROGRAM.Two-year entry-level program for
high-potential recent college graduates and undergraduate interns.
Areas covered include segment and operating-expense analysis,
intercompany accounting, cash-management analysis, pricing, credit
analysis,external reporting, and logistics.
FINANCIAL ROTATION PROGRAM.Three-year program for top employees
with 5 to 7 years experience. Consists of three one-year assignments,often outside participants home countries. Areas covered include in-
vestor relations, assistant controllership, procurement,
financial planning and analysis, treasury, and foreign exchange.
GLOBAL FINANCIAL EXCELLENCE PROGRAM.For employees with 10 to
12 years experience who have received (or are close to receiving)
their first executive appointments. Participants visit best-practices
companies to see how their CFOs and finance teams handle various
issues.
1.
3.
2.
24 CFO| July/August 2012 | cfo.com
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Thats what experts are saying
about a trading loss that knocked more
than $20 billion off the banks market
value, sparked probes by the Justice
Department and the Securities and
Exchange Commission, forced cred-
it-rating agencies to issue negative
outlooks for the bank, and turned thespotlight on a bank unit that was set up
to invest excess deposits but also gen-
erate a sizable profit.
According to JPMorgan, the banks
chief investment office was invest-
ing in a benchmark for credit-default
swaps designed to mitigate the banks
overall credit exposure, especially the
possibility of higher interest rates and
inflation. But the hedge was risky in
itself, and the positions in derivatives
were so large that they distorted the
market, experts say.
JPMorgan also may have failed to
fully understand its exposure because
it was relying too heavily on value at
risk (VaR), a common risk model that
estimates the potential loss in value ofa risky asset or portfolio over a certain
number of trading days.
In May, JPMorgan stated that the
trading positionsreportedly on a se-
ries of the 10-year Markit CDX North
American Investment Grade index
were riskier, more volatile, and less
effective as an economic hedge than
the firm previously believed. JPMor-
gan CEO Jamie Dimon admitted that
they were flawed, complex, poorly
reviewed, poorly executed, and poorly
monitored. Later that month at the
banks annual shareholder meeting in
Tampa, Dimon added that he couldnt
justify the mistake.
Improper from the Start
It screamed improper credit-risk
management to us from the very be-ginning, says Matthew Streeter, a
product manager at FINCAD, speaking
of when he heard about the incident.
(FINCAD is a developer of derivatives
risk-management software.)For one thing, the credit-index bets
introduced secondary risk exposures
that JPMorgan executives apparently
didnt take into account, says Streeter.
A key question to ask about hedging,
he says, is whether a hedge exposes
the insured to risk above and beyond
the risk the hedge is supposed to miti-
gate.
For another, the trades JPMorgan
was making were so large that they
were moving the market for the hedg-ing instrument, concentrating a lot
of risk on one side of the trade. Any
hedge on a $650 billion book will abso-
lutely drive the market, Streeter says.
Also, JPMorgans chief investment
office was doing what Streeter calls
speculative hedging: hedging with
the intention of making a profit. As
Ryan Gibbons, managing partner of
GPS Capital Markets, told CFOtwo
The $2 billion trading loss at JPMorgan Chase that
came to light in May stemmed from fundamental mis-
takes by risk managersin particular, the belief that a hedge
on credit exposures could both reduce the banks risk and
earn billions of dollars at the same time.
The Hedge That WasntJPMorgan Chases $2 billion trading miscue is a costly lesson in how not to protect
against potential losses. By Vincent Ryan
Jim Lo Scalzo/EPA /Landov
RISK
MANAGEMENT
The trading positions JPMorgan
Chase took were flawed, complex,poorly reviewed, poorly executed,and poorly monitored, according tothe firms CEO, Jamie Dimon.
26 CFO| July/August 2012 | cfo.com
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years ago, big gains and losses from
hedging spell trouble (see Seven Pil-
lars of Hedging Wisdom, CFO.com).
When companies make money from
hedging, they tend to forget what their
core businesses are, said Gibbons. Atthe high point of the chief investment
offices performance, in 2009, it man-
aged nearly 17% of the banks assets
and generated $3.1 billion in yearly
income.
But a former finance chief at JPMor-
gan takes the stand that hedging is in-
herently risky, and that if the firm was
taking a risk, it should have expected
to get paid for it. Who says you dont
earn money on a hedge? Dina Dublon,
finance chief of JPMorgan Chase from1998 to 2004, asked CFOin May. The
only time hedging is not risk-taking is
when you sell the position you are try-
ing to hedge; anything else, youre tak-
ing risk.
Dublon said JPMorgans chief in-
vestment office was not a separate
entity when she was finance chief, but
was housed within the banks treasury
function. Whether or not her finance
department hedged credit risk depend-
ed on the price of the hedge, she said.Sometimes you do, sometimes you
dont.
What Value at Risk?
When JPMorgan revealed the loss on
May 10, it said its risk measure had
underestimated the portfolios volatil-
ity. In the first quarter, JPMorgan was
monitoring its positions using a newVaR model, which was indicating the
chief investment office unit value at
risk was $67 million. But JPMorgan
scrapped that model and returned to
an older version once the loss was dis-
covered. It restated the VaR for its first
quarter as $129 million.
A VaR of $67 million at a 95% con-
fidence level implies the [chief invest-
ment office] should not incur losses of
more than $67 million on more than
three business days during the quar-ter, wrote CreditSights analyst David
Hendler in a report. But the restate-
ment meant that the office may have
incurred losses in excess of $129 mil-
lion on three days. Hendler concluded
that the losses put in question not only
the accuracy of JPMorgans VaR mod-
els but also the data being input into
those models.
A March 2008 report by a group
of senior global-banking regulators,
Observations on Risk ManagementPractices During the Recent Market
Turbulence, noted that many banks
used VaR, but did so in conjunction
with notional limits, stress tests, and
forward-looking scenario analysis.
Firms that avoided significant un-
expected losses used a wide range of
risk measures to discuss and challenge
views on credit and market risk, said
the report.
Despite all the tools available, regu-
lators and large, complex banking or-ganizations face a tough task in judging
the riskiness of many nontraditional
commercial-banking activities, testi-
fied Federal Deposit Insurance Corp.
vice chair Thomas Hoenig to a Senate
committee in May. Trading and mar-
ket-making are high-frequency activi-ties that can take place between [regu-
lator] exams with little evidence that
they ever occurred, he stated; moni-
toring trading on a high-frequency
basis would be costly for banks and
regulators.
Hoenig is proposing a strict divi-
sion of some of the banking functions
conducted by the big universal banks
like JPMorgan. Under his proposal,
commercial banks would be allowed
to perform some investment-bankingactivities but would be prevented from
making markets in derivatives or secu-
rities and trading securities or deriva-
tives for their own account or a cus-
tomers.
But there is little enthusiasm on
Wall Street for such an arrangement.
Asked by a Senate committee in June
to comment about whether the Dodd-
Frank Acts so-called Volcker Rule,
which would limit banks proprietary
trading, could have prevented JPMor-gans loss, CEO Dimon replied that the
rule was unnecessary. CFO
Thinkstock
ESSENTIAL KNOWLEDGE
What skill sets do risk managers need? An intimate knowledge of the
business and industry (cited by 67%of respondents) and a strategic
view of risk and risk managements role (64%) above all, according to
a February survey of C-suite members by the Risk and Insurance
Management Society and Marsh. Only 25%cited insurance knowledge.
Editors
Choice
The Real VaR Steps UpAverage value at risk
at JPMorgan Chases chief
investment office
Source: SEC filings
RestatedMay 10
Reported
April 13
$0
30
60
90
120
$150
1Q12
4Q11
3Q11
2Q11
1Q11
$129
$67$69
$48$51$60
5In $ millions
The FDICsHoenig wouldbar commer-cial banks fromtrading securi-
ties or derivatives for theirown account.Thomas Hoenig, vice chair of the FDIC
27cfo.com | July/August 2012 | CFO
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